How does virtual reality adoption affect firm risk? The role of external market environments

Abstract

It is unclear whether adopting virtual reality technologies in a firm’s manufacturing processes is a risky decision or serves to reduce risk. Our study answers this question by combining the Mahalanobis distance matching with the difference-in-differences (DID) analysis to quantify the effect of virtual reality-enabled manufacturing practices (VRMPs) on firm risk. We also consider how external market environments, in terms of market competition, dynamism, and munificence, influence the relationship between VRMPs and firm risk. Our DID analysis, based on 74 treatment firms that adopted VRMPs and 72 matched control firms without such adoption, suggests that VRMP adoption helps reduce firm risk. Moreover, the risk-reduction effect is more significant for firms operating in highly competitive and dynamic markets, but less so in the contexts of high market munificence. These results demonstrate VRMPs’ potential to reduce firm risk and highlight the important role of external market environments in shaping this relationship.